Thursday, May 10, 2012

The trend the last few months in global liquid production has been flat. The graph above, from OPEC's monthly oil market report, shows this continuing in April. This is of course bullish for oil prices - the global economy is still growing and thus will have a natural tendency to require more oil - something that can only be thwarted by higher prices.

On the other hand we have the ongoing debacle in Europe continuing to press downward on oil prices. The Greek elections have failed to produce a viable government and it looks like there might need to be further elections - which themselves may or may not produce a government. It now appears that Greece is in a dangerous downward spiral - one is reminded of Argentina in the early 2000s were the average lifetime of a new prime minister became about a week. When a country has no good options, one of the symptoms is the inability to form a stable government.

Meanwhile, it appears that German opinion is leaning to the idea of letting the Greeks go to the dogs:

Germany’s devotion to the euro and the European Union runs extremely deep and cuts across the political spectrum. But the frustration with Greece here is undeniable. There is a growing conviction that it is up to Greece to follow through on its commitments, that Europe is done negotiating.

“Germans are now predominantly of the opinion that they would be better off if Greece left the euro zone,” said Carsten Hefeker, a professor of economics and an expert on the euro at the University of Siegen. “If the country really is continuing on the path they are taking now, it would be hard to justify keeping them in. How do you deal with a country that says we don’t want to keep any of the commitments we have made?”

Yet, on Tuesday, the leader of the leftist Greek party that won the second-most votes in Sunday’s elections declared the loan agreement “null,” and refused to enter a coalition with the formerly dominant parties that supported it. With the so-called troika of lenders — the European Union, the European Central Bank and the International Monetary Fund — demanding budget savings of $15 billion by the end of June, the issue seems likely to come to a head soon.

It's pretty clear that the solutions currently being imposed on Greece are not acceptable to the Greek electorate who have withdrawn their consent from the governing parties. If Germany and the rest of the Europeans have no better ideas to reduce the pain in Greece, then the situation there will spin out of control and one way or another Greece will default again, and very likely leave the Euro.

That in itself might not be disastrous, but let's not forget that the pain in Spain is comparable to that in Greece:

As far as I can see, Europe has no better idea what to do about Spain than it does about Greece. And the financial implications of that are much larger. The whole project risks coming apart at the seams. As Kevin Drum put it yesterday:

Deep forces will win out in the long term no matter how many short-term fixes/obstacles are put in their way. In the case of the eurozone, there are deep structural imbalances — current account flows, productivity mismatches — that, on current form, look set to continue pretty much forever, and that's unsustainable in a fixed exchange rate area. Since things that are unsustainable eventually break, that means the eurozone is eventually going to break. The only thing that could save it is a set of equivalently fundamental changes to Europe's politico-economic governing structure, and there are darn few historical precedents for something like that happening within the space of a few years.

That's still not impossible, though. Impending doom can concentrate the mind wonderfully on occasion. All I can say is that (a) deep forces usually win, and (b) organizations are rarely willing to address them at a deep enough level to hold them at bay. The problem is that the solution to a deep problem has to work with it, not against it, and it's damn rare for either leaders or the led to have the vision to see this and act on it. So far the Europeans show no sign of being an exception.

So do I think the eurozone will break up, either wholly or in part? Yep. Could I be wrong? Absolutely. It certainly won't go down without a fight. But unless European leaders suddenly do a volte face and decide to face up to the real issues at hand and deal with them aggressively, it's hard to see a happy ending here. Don't be fooled by day-to-day ups and downs and press conferences and six-month plans and demands for austerity. Those are just distractions. Instead, ask yourself if eurozone leaders are addressing the deep forces tearing them apart. If they're not, they're just marching toward a cliff that's in plain sight and getting plainer every day.

I agree with Kevin that there's simply no sign of European leaders understanding and addressing the underlying causes of their problems. As long as there is a seriously thinkable option in which the Eurozone breaks apart in mid-air, with very unpleasant consequences for the global economy, oil prices are going to face significant negative pressure - and in turn the possibility of sudden upward moves when the European situation seems to improve, allowing the underlying situation of flat supply amidst a growing global economy to show through into prices.

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About Me

I'm a scientist and innovator in the technology industry, with a broad range of interests and experiences. I have a Physics PhD, MS in CS, and have done research, lived in cohousing communities, run a business, and designed technology products. Professionally, I have mainly worked on computer security problems. Currently I'm Adjunct Professor of Computer Science at Cornell, but this blog represents my views only.
Email me at stuart -- at -- earlywarn -- dot -- org. I do read all email, but because the blog is a part-time unfunded enterprise, I often fail to reply due to lack of time - apologies.